The Convergence of Sanctions & AML

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) in June 2024 released a special bulletin focusing on financial activity associated with suspected sanctions evasion. The bulletin provides critical insights into sanctions evasion methodologies and highlights indicators of suspected sanctions evasion to help Canadian financial institutions and other reporting entities meet expanded obligations under Canadian law and mitigate sanctions evasion, money laundering, terrorist financing, and other financial crimes.

• As of August 19, 2024, Canadian reporting entities—in addition to reporting transactions that may be related to money laundering and terrorist financing—must also report suspected sanctions evasion to FINTRAC.
• The bulletin notes that sanctioned individuals and entities likely will use established methodologies, such as the use of shell and front companies, proxies, and intermediary jurisdictions to evade sanctions. In addition, FINTRAC says that some sanctioned individuals are known to use trade-based money-laundering techniques to obscure the origins of assets they move through the global financial system, highlighting the importance of implementing AML controls to mitigate sanctions evasion risk.

Key Methodologies and Indicators of Potential Sanctions Evasion

The convergence of sanctions and AML has significantly accelerated since Russia invaded Ukraine in February 2022. FINTRAC noted in 2022 that Russia-based individuals and entities sanctioned by Canada—particularly those whose financial assets have been acquired through corruption and other illegal activity—are likely to deploy established money laundering methodologies to evade sanctions. Sanctions compliance and AML teams should collaborate and share data and intelligence to ensure well-rounded efforts to stop illicit actors.

• Sanctioned individuals and entities use non-sanctioned financial institutions and shell and front companies in third countries to move funds. Compliance officers should pay particular attention to jurisdictions traditionally associated with financial flows from heavily sanctioned countries, located in international trade hubs with noted AML deficiencies, and that show an increase in new company formations.
• Given the ever-evolving landscape of strategic trade controls, sanctioned individuals and entities may be working to gain access to weapons of mass destruction or dual-use technologies and machinery. Routing of purchases through known transshipment jurisdictions, such as China, Commonwealth of Independent States nations, Türkiye, and the UAE, require close scrutiny and examination of end-users, shipping documents, and other information that may indicate circumvention.
• The use of opaque corporate structures, such as shell, front, and shelf companies—a well-established money laundering technique—also helps sanctioned persons to obscure their access to the global financial system. In addition, illicit actors use non-resident banking—financial institutions registered in countries other than where the entity is registered—to evade sanctions.

Compliance officers should also closely examine clients and counterparties to detect the use of proxies or close associates, as well as professional enablers to move funds. In addition, FINTRAC warns that sanctioned individuals may use alternative financial channels, such as digital assets to move funds and integrate them into the financial system.

Reporting Requirements

Reporting suspicious transactions to FINTRAC is a critical regulatory obligation that helps protect the Canadian and global financial systems, prevent money laundering, terrorist financing, and sanctions evasion. FINTRAC notes in recent guidance that all information in a suspicious transaction report (STR) that helps identify the transaction as suspicious should be included.

• Firms and financial institutions should provide details related to the products and/or services involved in the suspicious transactions, including the accounts and addresses involved, particularly if they are linked to jurisdictions associated with the facilitation of financial flows from sanctioned jurisdictions.
• Reporting entities should include any information about the ownership, control, and structure of entities involved in suspicious transactions, such as owners, directors, officers, and those with signing authority, as well as any information about related persons or entities involved in the transaction.
• FINTRAC also notes that if a transaction is suspected of being related to both money laundering and terrorist financing and sanctions evasion, financial institutions and other reporting entities should submit one report containing all the details for all suspected offenses, further highlighting the convergence of AML/CFT and sanctions compliance.

FINTRAC adds in its guidance that every person in Canada and every Canadian located outside the country must also disclose to the Royal Canadian Mounted Police or the Canadian Security Intelligence Service the existence of property that is owned or controlled by a designated person, as well as any proposed transactions related to that property.

Enhancing Legislative Measures

Canada’s federal government since 2015 has introduced a series of legislative amendments to the Criminal Code and the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to strengthen the investigative, enforcement, and information-sharing tools of Canada’s anti-money laundering/counter financing of terrorism regime.

Canada’s 2023 Fall Economic Statement proposes new measures to further safeguard the country’s financial system against financial crimes, including  legislative measures aimed at combatting sanctions evasion. These measures, according to FINTRAC, authorize the agency to use its expertise to develop intelligence products and disclose its findings to law enforcement partners, when appropriate, to support investigations.